My answer (of course) is it depends. It depends on your specific facts and circumstances.
Today, I’ll share some of the key factors to consider to help make this decision.
– When can you take distributions from your retirement plan without penalty?
– What is your expected return on investment inside of your retirement plan?
– What is your expected return on investment outside of your retirement plan?
– What will you do with the investment long term?
It’s important to not only understand the tax implication of using debt in your retirement plan, but also to understand how it can impact your investing. Many lenders are not willing to make a loan to a retirement plan without a personal guarantee. However, a personal guarantee, as noted above, could trigger tax. Lenders who are willing to lend to a retirement plan without a guarantee are usually not willing to lend as much as they would if there were a guarantee and the rate is usually higher.
It is extremely important to understand your leverage options inside and outside of your retirement plan before moving forward with your investment.
Another example is investments that create losses for tax purposes. Some investments, like rental real estate or oil and gas, often create losses for tax purposes even though they generate positive cash flow. Losses inside a retirement plan are typically lost because the retirement plan usually doesn’t have any tax for the losses to offset.